How We Manage Portfolios

Believe it or not, one of the things that we rarely get asked is how we manage portfolios. I’m not exactly sure why that isn’t a popular topic of conversation, but I think it’s an important one.

Managing and putting together a portfolio for clients is a combination of an art and science. As many of you know we have several portfolio models that we utilize for clients. Let's explore what we do in the form of a Q&A format below:
 

1. Why do we use models?   Imagine having over 500 clients and each client has a different portfolio – it would be virtually impossible to know how the investments in any particular account are performing or if anything has changed.  If each client has only 10 positions that would be 5000 different positions that we’d have to track.  By using a model, we can keep tabs on the 100 or so various positions with the use of a variety of technology and tools. 
    
2. How do you choose investments for our portfolios?  This is the fun part, because there are literally thousands to choose from and of course we have to reduce that number significantly so that we can pick from the cream of the crop. 
    
   1.  Our first step was to develop an asset allocation that we felt could weather the test of time which we did through back testing a variety of strategies using indexes as far back as we could go.  Those indexes included fixed income investments, US large, medium, and small companies, international, emerging markets, real estate, and commodities.
       
   2. Next, we needed to find investments that would fit into that back tested allocation and make them different enough to diversify for clients with multiple accounts.  We call those our models  We use tools like Morningstar which ranks funds based on a variety of factors, fi360 that uses 12 different criteria to score investments based on things like costs, management history,  alpha, risk, 1,3,5 and 10 year track records compared to their peers and other criteria, yahoo finance and other software to help us figure out which investments provided the best risk/reward for the money.   In addition, we have monthly/quarterly meetings in house and with 3^rd party investment firms like Goldman Sachs, JP Morgan, First Trust, American Funds, and others to get portfolio reviews, discuss industry trends, and get economic and market updates.
       
   3. Next, we wanted to own some individual securities like stocks because clients liked knowing they had ownership in specific companies rather than just mutual funds.  This is where the art comes in.  We’d talk to people about services or products that they were using. We’d listen for new technology or health care breakthroughs.  The key here was to invest in companies that had a high cost of entry or another way to put it was little potential competition.  We also look for companies that are disrupters, that change the way people live their lives.  Sometimes we look at companies that we feel have been oversold because of some bad news.   There’s a ton of research that we use to confirm or contradict our thoughts and findings. 
      1. As a side note: One of the biggest mistakes we see novice investors make is that they look at past performance as the only criteria in picking an investment.  We often use driving a car as an analogy - it’s important, but you wouldn’t drive down the road only looking through the rear-view mirror, would you?  Of course not, it’s important to keep an eye in the rear-view mirror, but there’s so much more to pay attention to.
          
3. Selling: While selling can be challenging, there are multiple reasons we may sell a security.   
   1. We may find something we think is more attractive and have to make a decision to reduce or eliminate a position because of that.
   2. In taxable accounts, we may need to take some tax losses to control capital gains prior to year-end.
   3. We look to sell investments whenever one of the reasons we bought has changed.  
   4. We also may sell a portion of a security if a position has appreciated so much that it makes up too large of a position in our portfolios.
   5. Lastly, if you need money, we’ll likely need to liquidate securities to raise cash for your needs.
       
4. We also look for new types of investments, which is how we recently started using the buffered exchange traded funds that provide downside protection along with participation in the upside of a market index like the S & P 500.
    
5. Lastly, we talk to you about how aggressive or conservative you’d like your portfolio to be because each one of our models can be built around your risk tolerance.    Someone with a low risk tolerance could have the same model as someone with a high-risk tolerance, meaning you’ll own all the same investments, but a different proportion of each security to either have a higher fixed income exposure or higher equity exposure depending on what you tell us.

“Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.” 
“No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of The Pitti Group’s strategies are disclosed in the publicly available Form ADV Part 2A” 
“Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of issuer default; issuer credit risk; liquidity risk; and inflation risk.” 
“Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which: “Diversification does not ensure a profit or guarantee against loss.”
“For additional information, please visit our website at https://www.thepittigroup.com/.”